Noah Brooks:
Welcome back to another installment of the Market Enthusiast. I’m Noah Brooks. With me it’s Chris needs. So we were here two weeks ago. Anything happened in the last two weeks.
Chris Needs:
Got a little bit of a growth scare. I guess if you look back a couple weeks. We had a jobs report that was off the recent trend, we’ll say 114,000 jobs and then we pair that with a Japanese yen carry trade blowing up kind of. He had buffet selling, he took his cash reserves up to 277 billion. So a couple of things that spooked the market a little bit. Spiked volatility. Yeah,
Noah Brooks:
A little market meltdown on Monday last week, huh? A little bit
Chris Needs:
Of the scare. Yeah, we got a little adrenaline going, looking back to that morning.
Noah Brooks:
So here’s the interesting thing. Market was down. I took a snapshot of my screen. Dow was down over a thousand points. S and p was down 5%.
Chris Needs:
Nasdaq was down, I know five and a half percent-ish at the open. Yeah,
Noah Brooks:
It was pretty rough. But here we are two weeks later and we’re actually higher than we were the last time we recorded this. Almost like nothing happened. It’s a little bit weird.
Chris Needs:
Well, I mean last week when we had all the volatility, we started off awful on Monday, but the s and p 500 was down what, two basis points on the week?
Noah Brooks:
Yeah, less than a percent. I think was back like a quarter. It was kind of a nothing burger. Yeah. So you mentioned the yen carry trade. I want to bring that up to all their listeners because they just float that around on the news. Tell us exactly what a carry trade is and specifically for the Japanese market. So everybody knows.
Chris Needs:
So a carry trade is just where you basically borrow in a very low interest rate currency. So you have a low interest rate to pay back, and then you take those assets that you got from the loan and you put into another security. Most often it’s done with another currency that’s a higher yielding currency, but it could go into any security basically. And the Japanese yen has historically in recent history been very low yielding in terms of interest rates on zero. Basically so many investors loaded up on that carry trade and they would, instead of borrowing at 5% US dollar, they’d borrow in yen and then buy something else with it. Just a little arbitrage. But that gets blown up when the yen strengthens and appreciates pre drastically like it did last week.
Noah Brooks:
So two Fridays ago, the jobs report came out and it wasn’t great. It wasn’t horrible, it wasn’t great. 114,000 jobs. And then that night, as I was messing around in the evening, the Japanese market was down dramatically. I think it wound up being down like six or 7% on that Friday. Then on Monday we came in and overnight the market had been down. I think it closed down 12 point a 5%. I went back, it had its high the same day as the nasdaq. All time high for the Nikkei was 44,000, 42,000, something like that. And then in a matter of from July 16th through August 5th, it was down 25%. So it went through correction into depression territory there a little
Chris Needs:
Bit. Yeah. The yen was trading in the area of one 70 to the US dollar and then on that Monday it had fallen to I think it was like 142,
Noah Brooks:
Which
Chris Needs:
Really blew up those trades. And there was more fear in the market that it was something more systemic. Maybe some of these very leveraged investors were in other markets and they didn’t know initially how far it would go. But a couple days later we saw the unwind was done and volatility faded back. We saw the VIX spike to 66 on that Monday, but by the end of the day it had fallen back to the 38 range.
Noah Brooks:
So this is the thing with the vix and most people know volatility index. It’s something that is an indicator of volatility. It tracks the difference between short-term options and longer term options on the s and p 500, it spiked to levels that we haven’t seen since Covid and since the global financial crisis
Chris Needs:
All on a 25 basis point hike by Japan and a jobs report.
Noah Brooks:
It doesn’t seem like that’s a great indicator if its measurement was the same as the global financial crisis where covid over nothing.
Chris Needs:
A real no emergency scenario.
Noah Brooks:
Yeah, I think we should keep that in mind as we continue to talk about the VIX over the next five years. Just remember that one time where it was completely out of whack. Yeah, so I mentioned that the market is actually higher than the last time we were in here recording two weeks ago. Year to date s and p 500, a little over 16%. Great returns for the year, mid caps up eight and a half small caps. That rotation that we were talking about two weeks ago still in play, it hasn’t worked out so well.
Chris Needs:
It lost its juice when we ran into that volatility spike
Noah Brooks:
A little bit. So I mean today small caps are up, market’s up pretty dramatically today overall small caps are up 6% for the year. So for the quarter we have growth that’s actually down a little bit and value up 4 25. So there is the rotation that’s happening, small caps are still down for the quarter. It’s going to be one of these things that I personally think small caps will continue to rally as we get closer to that Fed meeting in September. What do you think they’re going to do in September?
Chris Needs:
I think we’re going to get 25 basis points and then they’ll maybe wait until November or December for maybe another 25 basis points. Assuming things don’t change drastically in that time, I was happy to see they didn’t give into the market on that Monday or Tuesday and do something emergency.
Noah Brooks:
I don’t think it necess there. Well, people calling for, oh, they need to, if you’re watching CNBC or Bloomberg, people are calling for an emergency rate cut. It just doesn’t make any sense. I mean the fed’s been out there waiting on the data for two years and now we’re actually starting to get the data that’s required and then people are pounding the table on an emergency. It
Chris Needs:
Was a Monday morning quarterback scenario for
Noah Brooks:
Sure. It was Monday morning. Yep. It’s one of those things where sometimes bad news is not that bad. In some cases it can be good news. So if the Fed is lowering, that’s good news. But if the Fed lowers from an emergency standpoint, that means that the economy is so bad they have to do this emergency lower, which is really bad. That’s not good news that they’re lowering under those circumstances. So it’s under the lens in which they make that move that really plays into how the market responds to it.
Chris Needs:
And we’ve seen sort of a change in reaction to economic data where prior to it was like bad news was cheered on because it pulled forward rate cuts and it seems like again, bad news is bad news and good news is good news. So we saw the market rally strongly on last Thursday when we got the initial claims that sort of indicated people weren’t losing their jobs. So maybe that unemployment going up to 4.3 was because the denominator, the number of people potentially to be employed was growing rather than the nominator denominator falling down.
Noah Brooks:
So it is not an issue of a lack of demand, it’s an issue of more supply.
Chris Needs:
Exactly.
Noah Brooks:
And that’s how you can continue to have job growth while the unemployment rate actually goes up. And I guess you could make a case that the unemployment rate going up is good because it will force labor rates down that wage inflation that we’ve been seeing for years. Now it depends on which side of the coin you’re on. If you’re just coming into the job market, you want to see that wage inflation go up, but that means inflation in general is going up. So probably not, but the Federal Reserve is looking to see wage inflation relatively low. They’re looking to see inflation numbers come down. We know that they want to see a two. There was a report out yesterday, CPI, what did it start with?
Chris Needs:
We got 2.9. Got it too.
Noah Brooks:
First one since March of 2021. Right. I mean that’s
Chris Needs:
Big time after a good PPI report as well, largely in line, but that’s what we want at this point. We don’t want a drastic fall in CPI or drastic fall in PPI because that would insinuate there’s some sort of demand destruction, which as we just mentioned, it’s not a demand issue we’re dealing with. We’re just getting a little bit more supply.
Noah Brooks:
I have a parking lot indicator. I don’t know if you have any of those indicators, but here in where I live, I always think to myself, during the global financial crisis, I would go into the major shopping center area and the Target and the Walmart and all those places. And at that time you’d go in on a Saturday afternoon and there was very few cars there and it really took a fair amount of time to actually see people coming back and shopping. And this is my daily habit. I go in, I look around, the parking lots are full. I mean there’s no question about it. That’s obviously anecdotal, something that I look at, but that’s
Chris Needs:
Like a Jim Cramer thing. Back in the day you said he would go out to Philadelphia Mills, was it called up in the northeast and he’d look at the traffic in the store and just say, Hmm, this is where the consumer’s at or how retail strength is. And we got a good retail number today as well. So it was up 1% versus I think it was only 0.3% expected. And it’s nice to see the consumer hanging in there and again, just reiterates, we’re not looking at an economic crash scenario, just a slow and steady slowdown would be kind of what the Fed’s goal was and what we’re looking for at this point when we’re looking at the data.
Noah Brooks:
So you said a slowdown. I just want to add to that a little bit. For all intents and purposes, we were locked up in 2020. We were locked up in 21 for myself and my wife. We didn’t really start doing anything until 2022, late 2022 as a matter of fact. And then I heard this term coined at some point last year, revenge spending and I was locked up for all that time. Let’s go here, let’s do this, let’s buy that. And I would say that I’m probably guilty of it
Chris Needs:
A little bit of treat yourself in there there a
Noah Brooks:
Little bit of treat yourself, right? It’s like a spa day sometimes only
Chris Needs:
Spending, are you
Noah Brooks:
Avenging yourself? I don’t get that part. But no, you’re making up for lost time, right? Trying to pack in things that you didn’t do over that time period. And I would tell you that I think a lot of people participated in that. I certainly know we did. I would imagine you did as well. And my position on this slowdown is that it’s less of an economic slowdown and more of a return to normalcy of spending. And so I think we are going to see some type of slowdown, but it’s not the same thing as certainly not a recessionary type of scenario. Anything could change, but we’re not in that position where the housing market is about to crack. We went through a time period in the global financial crisis where we were giving out mortgages to landscapers making 30 grand a year, could buy an $800,000 house.
Noah Brooks:
That’s not happening. The mortgage market is in good shape. In fact, mortgage rates are coming down in anticipation of the federal reserve lowering rates. I had a note here. We were at 4, 7, 5 on the 10 year earlier this year. I think it was April mid-April 4, 7, 5. Today we’re at three eight, well under 4% on the 10 year. And mortgage rates are just coming down. I don’t want to say dramatically, but they’re coming down. That’s going to really be helpful. There was an article this weekend about people refiling already from their stuff six months ago or eight months ago, just kind of nutty.
Chris Needs:
People were chomping the bit. I’m sure a lot of realtors out there were telling them, oh, don’t worry about this high mortgage rate, you’ll be able to refi shortly. So everybody’s been chomping the bit, sort of keeping an eye on the rates and I don’t know what the trade off is, but maybe when you’re one and a half percent down from the highs, it becomes a good financial decision. Refi, there’s cost associated obviously when you refi, but
Noah Brooks:
Yeah, well, so rates coming down bad for money Market mutual funds good for bonds, right? So the bond index is actually up. I mean we had three back to back years of negative returns in the bond market and here we are bond index up a little over 2.75% as we stand right now. I mean it’s not great, but it’s certainly not down for the year. So I think and what we saw the other day with on Monday when the market was down, bonds were up.
Chris Needs:
We briefly saw that again, intraday on inversion of the twos and tens, which has since gone back. We close a day, still inverted, but we’re getting there. Was it, I think it was 11 basis points when we’re looking at it this morning. So we are very close to breaking that record inversion.
Noah Brooks:
Yeah, absolutely. So speaking of records, I saw this, it’s a little bit morbid. It’s a list, the top 10 causes of death in the United States last year and it just came out, which is why I say what makes me think of it, but Covid was number 10 on the list down from number four last year, and I don’t know if you know anybody with Covid right now, but I actually know a few people. It seems like it’s coming back a little bit. Number one on that list of killers for 2022, heart disease, 22% of all deaths, almost 700,000 people. The
Chris Needs:
Normal leader is heart disease
Noah Brooks:
Generally just second cancer, all sorts of cancers. So those are both 20% or more and then it dropped down to accidents or unintentional injuries at 7.5%. On there you have strokes, COPD, Alzheimer’s diabetes, kidney disease, liver disease, and then covid. It’s wonderful. This is kind of weird. Wonderful to see Covid coming off and I guess the normal stuff going back, I don’t want to deal with that again, but there are some people that I know there are some people out there, so
Chris Needs:
It’s hanging around. Yeah.
Noah Brooks:
Are you
Chris Needs:
Going to, it’s trying to stay relevant.
Noah Brooks:
It’s trying to stay relevant. I hope it doesn’t. Yeah, I hope it doesn’t. What else do we have? Economic speaking or anything?
Chris Needs:
Well, we could follow up with, we were talking sort of joking around about what was the biggest eBay items out there. Oh, last time. Yeah, so in history, the purchases, there was a gig that was apparent. Again, had no business being on eBay is how I look at, but 168 million,
Noah Brooks:
That was the largest purchase ever on eBay. Yep. Okay.
Chris Needs:
There was a Gulfstream two jet that was 4.9 million. Huge disparity there. Again, two things that I don’t think should be on eBay, but I guess that’s where they wanted to make their stand and sell it. Was it
Noah Brooks:
The founders of eBay and we know who they are, right?
Chris Needs:
Yeah, but I don’t know who were the sellers. That would make sense though. Someone associated, and then third was an interesting one, lunch with Warren Buffet at 2.6 million.
Noah Brooks:
Would you pay 2.6 million for lunch with the Bar Buffett?
Chris Needs:
I don’t have 2.6 million.
Noah Brooks:
Oh, great. Yeah.
Chris Needs:
Got it, got it. But no, I probably wouldn’t. I could just read the thousands of books about him. I’d be good with that.
Noah Brooks:
Okay. I mean I wouldn’t mind talking to him if I didn’t have to give him 2.6 million.
Chris Needs:
Buy share, Berkshire, Berkshire and try and meet him in Omaha. Yeah.
Noah Brooks:
Okay. Let’s touch on inflation a little bit. We just said that it came down to 2.9, that was the headline number, core inflation just a little bit higher at 3.2, but it does seem like we’re moving in the right direction. Certainly around here in Iron Neck of the woods, gas is continuing to come down. There are some things that are going up a little bit, right?
Chris Needs:
Yeah, of course there is. I mean we still have insurance that’s hanging around higher than normal. I’m sure with hurricane season that won’t help. Obviously that’s not car insurance, but you’ll probably see home insurance. Everybody’s heard about Florida and how tough it is to get insurance down there. There’s still pieces that are going up, but it’s certainly not like last year or especially two years
Noah Brooks:
Ago. I was talking to one of our advisors at a conference this past weekend and they were telling me their parents have a place Coral Gables, that they paid something like 350,000 for maybe 10 years ago and I guess they paid off the note maybe 15 years ago, but their home insurance is like $2,500 a month. They’re hurricane insurance, flood insurance, things like that. That’s kind of nutty.
Chris Needs:
Yeah, that’s difference making right there for sure. Difference
Noah Brooks:
Making. Yeah. Anything else notable?
Chris Needs:
We had the DOJ coming down on Google, thought that was interesting. First real antitrust case. Google was apparently monopolizing or doing unfair practices with Google search with exclusivity deals and buying spots on, for example, like phones and things like that, browsers. And they basically lost that court case. I think it actually concluded in May, but they’re weighing basically what they’re going to penalize them with, which could potentially be breaking them up. Now we had Microsoft back in 98 sort of lose, but then on appeal they sort of won on appeal and basically a lot of the penalties or repercussions were mitigated. And then before that you have to go back to the eighties with at and t when,
Noah Brooks:
Sure, my bell was broken up, but Microsoft was accused and it seemed like they were proven to do some of the same exact things with the exclusive deals that Google’s doing. It was on the computer and instead of the phone. But I mean you think about search engines, I know that there’s people like I use DuckDuckGo because they don’t sell my stuff. I’ve heard that. We know someone in here that does that. But imagine trying to start a company, a search engine company today, how there’d be no way to do it. Even if you had a lot of money, there would be no way to do it. You would get zero traction. You would have no computer retailers, no phone retailers that would put you in there as a default.
Chris Needs:
There has to be a way to differentiate from the existing and that’s so difficult with the cash outlay that would need to be done. But the closest thing you think of maybe an open AI would be slightly different than a normal search that could affect Google and obviously Google was affected by that when open AI came out. I thought it was interesting. You mentioned Duck, duck go. Their CEO was actually testified. He was called to testify about and he said, no, don’t break them up, just prevent these exclusivity deals. And I thought that was pretty interesting. You just call up their competitors to come testify against you or weigh in on it.
Noah Brooks:
Who else are you going to call? Speaking of CEOs, what CEO news do we have this past week, right? Starbucks?
Chris Needs:
Yeah, that was big news. Starbucks poached Chipotle’s, CEO Brian. Yeah, Brian Nichol. And basically he got a massive deal to go to Starbucks. It moves Starbucks stock drastically 25%. And then on the other side of things, Chipotle got hit on it. They got down to I think at most maybe 13% intraday before coming back a little bit. But definitely big news. He gets to stay in his home in California. He’s not required to be on location in Seattle. He got a good little gig, good pay package. Hopefully he’ll start a turnaround story with them and maybe get their online going correctly. They’ve had struggles with their online and their app and it was a big move though for sure. It was a big win for Starbucks. Apparently Howard Schultz was happy with it.
Noah Brooks:
Well, so we should delve in. What’s the gentleman who he’s replacing?
Chris Needs:
I don’t know the name off the top of my head, but he had a rough little stint.
Noah Brooks:
He was kind of famous for saying that he stopped work at six o’clock at night and it would have to be somebody really, really important for him to answer the phone. And you’re like as the CEO of a Fortune 100 company, you’re going to stop work at six o’clock tonight or six
Chris Needs:
O’clock. Funny thing with a stock like that, the market immediately weighed in and it’s like this is what they thought of you and this is what they think of the new guy.
Noah Brooks:
Yeah, tough. That would be tough on my psyche, but I mean he kind of did it to himself. I don’t know where everything goes. Especially Starbucks because it seems like they’ve had the market cornered on coffee for forever essentially. And now you’re starting to see a lot of other franchises pop up and I’ve tried a number of them. I’m not a giant coffee drinker, but I’ve tried a number of them and there’s some other, and there’s a Dunkin Donuts everywhere you look, but around here we have
Chris Needs:
Seven Brew, seven brew
Noah Brooks:
And it’s pretty good.
Chris Needs:
I like the Rice coffee Dutch bros out on the West Coast. Dutch
Noah Brooks:
Brothers, right? Yeah. I mean, so I don’t know how you have that moat around you because it’s Starbucks and then after a while it’s just like, well, okay, there’s lots of other coffee
Chris Needs:
Places. I mean there’s a number of things. We talk about inflation and everything. I got a large coffee large latte, and my wife got a medium iced coffee and it came out to $15 at Starbucks. I’m like, it does pack a little extra punch. I don’t know if it’s worth $15. I could get three coffees and two sandwiches at Dunkin Donuts for that same price. Yeah,
Noah Brooks:
I’ve been on their Starbucks cold brew in a can and I found that you can ’em by the 12 pack on Amazon, eight pack on Amazon and they’re only like 2 65 a piece instead of at the soar. They’re like four 50 a piece. So yeah, I ordered two cases the other day.
Chris Needs:
Speaking of CEOs, Boeing found a new CEO Kelly, he was at Rockwell and he had overseen a number of transitions and then ultimately, I guess Rockwell got bought out by Raytheon and that’s when he sort of stepped away, but he got tapped for the Boeing role to sort of lead their turnaround. NASA actually hit Boeing with another thing saying they’re opening an inquiry into their space launch system. Well how about these astronauts just continues. They’re stuck up there. So they
Noah Brooks:
Were supposed to be up for two weeks and now it could be a year. I mean you prepare yourself for something like, Hey, I’m going to go to summer camp. It’s going into space for two weeks and then all of a sudden, hey,
Chris Needs:
You going to stay a little longer, a little
Noah Brooks:
Bit longer. And now it’s not until March of 2025.
Chris Needs:
Yeah,
Noah Brooks:
That’s nutty. I couldn’t imagine. And how would they have the provisions for that?
Chris Needs:
They’re going to have to stretch him. You ever watch The Martian where he’s booking out one quarter of a potato? That’s what I imagine’s going on up there. The female astronaut, I apologize, I don’t have her name, but they showed her talking and I feel like it was representative where her mind’s probably at because her hair was just all crazy on this.
Noah Brooks:
What are you going to do? You can’t take a shower. Shower, can you inquiring minds want to know? Yeah,
Noah Brooks:
We will come back to that one Now we were talking about Microsoft a little bit earlier and famously Microsoft’s in most operating systems except Apple. I mean I guess there’s some people out there using a few different things. The majority of people are using a Microsoft platform. There’s another large majority, I guess that’s not another, there’s another group of people that are using Apples, but one way or the other, you’re going to touch those two products. August 12th, earlier this week it was the 43rd anniversary of IBM bringing out the pc, the first pc, so that was August 12th of 81. They did that 43 years ago and we’ve already gone through the pc. I mean everybody in the firm has a pc. Everybody out there listening to this has a PC or a laptop, but now we’re in a situation where we’re just moving to larger phones.
Noah Brooks:
Right? I went back, I looked at IBM since that time period, since August 12th of 81 and they’re stock and there’s not too many companies out there. There’s certainly some that have been around that long, but IBM since then is up 2450%. I looked at Microsoft over that same time period. Now they weren’t out in 81, they came public in March of 86, but from that time period they’re up 650000% versus the 2400% from IBM. And you think about Blockbuster and Netflix, right? Blockbuster could have been Netflix, JCPenney, could have been Amazon when I was a kid. We would go to the
Chris Needs:
IBM didn’t evolve.
Noah Brooks:
Yeah, they didn’t evolve. We would go to the Not warehouse. The J Ney had a catalog outlet that you’d buy stuff on the catalog and then it would come in and they’d call you and say it’s here and you’d go to town and you get it. Had they just worked on that a little bit, they could have been Amazon. All right,
Chris Needs:
Got to be a visionary. Got to make those changes. Got to look at your processes and update ’em. I think Bill Gates had a process of every year or two years you need to review. Every two years you do a hard review and in three years if it hasn’t changed, you need to get rid of it,
Noah Brooks:
Basically
Chris Needs:
Do something better.
Noah Brooks:
Well, I guess we’re always looking for the next Microsoft and not IBM, although recently IBM has done pretty well over the last year or two, but historically it has not been a great performer. Especially not over that time period, but maybe they’re looking to reinvent themselves. Alright, so we know a rate cut is coming. We think it’s in September. I would be surprised if it’s not, but I guess there’s a chance if you’ve been listening to this, we’ve said, I said six months ago, I didn’t think it was going to be until after the election. There’s an election coming up. I didn’t think it was going to be until after the election. Now it looks like it is going to be, and there’s a debate about whether it’s going to be 25 or 50. I don’t know that it really matters. It’s telegraphing that the rate cut cycle is coming. I think that’s the point that’s important. Market is ready for it. I think if we do get 50, it might be a good week in the market. Good move there. I think if we get 25, it’ll start that cycle and they’ll continue to lower. Especially
Chris Needs:
With, I’m sure with Jackson Hole coming up next week, I’m sure Powell’s going to lay the groundwork and sort of give us an insight what to expect. So we’ll keep an eye and gauge whether he’s edging towards 50 or 25 in September.
Noah Brooks:
Yeah. Awesome. Alright everybody, thank you so much for tuning in. As always. I’m Noah Brooks, and with me is Chris needs questions, comments, thoughts, anything you want us to take a look at? Send your emails to market enthusiast@goodlifefa.com. Until next time, don’t bet against America, anybody.
Disclaimer
The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a decision. Economic forecast set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Noah Brooks:
Welcome back to another installment of the Market Enthusiast. I’m Noah Brooks. With me it’s Chris needs. So we were here two weeks ago. Anything happened in the last two weeks.
Chris Needs:
Got a little bit of a growth scare. I guess if you look back a couple weeks. We had a jobs report that was off the recent trend, we’ll say 114,000 jobs and then we pair that with a Japanese yen carry trade blowing up kind of. He had buffet selling, he took his cash reserves up to 277 billion. So a couple of things that spooked the market a little bit. Spiked volatility. Yeah,
Noah Brooks:
A little market meltdown on Monday last week, huh? A little bit
Chris Needs:
Of the scare. Yeah, we got a little adrenaline going, looking back to that morning.
Noah Brooks:
So here’s the interesting thing. Market was down. I took a snapshot of my screen. Dow was down over a thousand points. S and p was down 5%.
Chris Needs:
Nasdaq was down, I know five and a half percent-ish at the open. Yeah,
Noah Brooks:
It was pretty rough. But here we are two weeks later and we’re actually higher than we were the last time we recorded this. Almost like nothing happened. It’s a little bit weird.
Chris Needs:
Well, I mean last week when we had all the volatility, we started off awful on Monday, but the s and p 500 was down what, two basis points on the week?
Noah Brooks:
Yeah, less than a percent. I think was back like a quarter. It was kind of a nothing burger. Yeah. So you mentioned the yen carry trade. I want to bring that up to all their listeners because they just float that around on the news. Tell us exactly what a carry trade is and specifically for the Japanese market. So everybody knows.
Chris Needs:
So a carry trade is just where you basically borrow in a very low interest rate currency. So you have a low interest rate to pay back, and then you take those assets that you got from the loan and you put into another security. Most often it’s done with another currency that’s a higher yielding currency, but it could go into any security basically. And the Japanese yen has historically in recent history been very low yielding in terms of interest rates on zero. Basically so many investors loaded up on that carry trade and they would, instead of borrowing at 5% US dollar, they’d borrow in yen and then buy something else with it. Just a little arbitrage. But that gets blown up when the yen strengthens and appreciates pre drastically like it did last week.
Noah Brooks:
So two Fridays ago, the jobs report came out and it wasn’t great. It wasn’t horrible, it wasn’t great. 114,000 jobs. And then that night, as I was messing around in the evening, the Japanese market was down dramatically. I think it wound up being down like six or 7% on that Friday. Then on Monday we came in and overnight the market had been down. I think it closed down 12 point a 5%. I went back, it had its high the same day as the nasdaq. All time high for the Nikkei was 44,000, 42,000, something like that. And then in a matter of from July 16th through August 5th, it was down 25%. So it went through correction into depression territory there a little
Chris Needs:
Bit. Yeah. The yen was trading in the area of one 70 to the US dollar and then on that Monday it had fallen to I think it was like 142,
Noah Brooks:
Which
Chris Needs:
Really blew up those trades. And there was more fear in the market that it was something more systemic. Maybe some of these very leveraged investors were in other markets and they didn’t know initially how far it would go. But a couple days later we saw the unwind was done and volatility faded back. We saw the VIX spike to 66 on that Monday, but by the end of the day it had fallen back to the 38 range.
Noah Brooks:
So this is the thing with the vix and most people know volatility index. It’s something that is an indicator of volatility. It tracks the difference between short-term options and longer term options on the s and p 500, it spiked to levels that we haven’t seen since Covid and since the global financial crisis
Chris Needs:
All on a 25 basis point hike by Japan and a jobs report.
Noah Brooks:
It doesn’t seem like that’s a great indicator if its measurement was the same as the global financial crisis where covid over nothing.
Chris Needs:
A real no emergency scenario.
Noah Brooks:
Yeah, I think we should keep that in mind as we continue to talk about the VIX over the next five years. Just remember that one time where it was completely out of whack. Yeah, so I mentioned that the market is actually higher than the last time we were in here recording two weeks ago. Year to date s and p 500, a little over 16%. Great returns for the year, mid caps up eight and a half small caps. That rotation that we were talking about two weeks ago still in play, it hasn’t worked out so well.
Chris Needs:
It lost its juice when we ran into that volatility spike
Noah Brooks:
A little bit. So I mean today small caps are up, market’s up pretty dramatically today overall small caps are up 6% for the year. So for the quarter we have growth that’s actually down a little bit and value up 4 25. So there is the rotation that’s happening, small caps are still down for the quarter. It’s going to be one of these things that I personally think small caps will continue to rally as we get closer to that Fed meeting in September. What do you think they’re going to do in September?
Chris Needs:
I think we’re going to get 25 basis points and then they’ll maybe wait until November or December for maybe another 25 basis points. Assuming things don’t change drastically in that time, I was happy to see they didn’t give into the market on that Monday or Tuesday and do something emergency.
Noah Brooks:
I don’t think it necess there. Well, people calling for, oh, they need to, if you’re watching CNBC or Bloomberg, people are calling for an emergency rate cut. It just doesn’t make any sense. I mean the fed’s been out there waiting on the data for two years and now we’re actually starting to get the data that’s required and then people are pounding the table on an emergency. It
Chris Needs:
Was a Monday morning quarterback scenario for
Noah Brooks:
Sure. It was Monday morning. Yep. It’s one of those things where sometimes bad news is not that bad. In some cases it can be good news. So if the Fed is lowering, that’s good news. But if the Fed lowers from an emergency standpoint, that means that the economy is so bad they have to do this emergency lower, which is really bad. That’s not good news that they’re lowering under those circumstances. So it’s under the lens in which they make that move that really plays into how the market responds to it.
Chris Needs:
And we’ve seen sort of a change in reaction to economic data where prior to it was like bad news was cheered on because it pulled forward rate cuts and it seems like again, bad news is bad news and good news is good news. So we saw the market rally strongly on last Thursday when we got the initial claims that sort of indicated people weren’t losing their jobs. So maybe that unemployment going up to 4.3 was because the denominator, the number of people potentially to be employed was growing rather than the nominator denominator falling down.
Noah Brooks:
So it is not an issue of a lack of demand, it’s an issue of more supply.
Chris Needs:
Exactly.
Noah Brooks:
And that’s how you can continue to have job growth while the unemployment rate actually goes up. And I guess you could make a case that the unemployment rate going up is good because it will force labor rates down that wage inflation that we’ve been seeing for years. Now it depends on which side of the coin you’re on. If you’re just coming into the job market, you want to see that wage inflation go up, but that means inflation in general is going up. So probably not, but the Federal Reserve is looking to see wage inflation relatively low. They’re looking to see inflation numbers come down. We know that they want to see a two. There was a report out yesterday, CPI, what did it start with?
Chris Needs:
We got 2.9. Got it too.
Noah Brooks:
First one since March of 2021. Right. I mean that’s
Chris Needs:
Big time after a good PPI report as well, largely in line, but that’s what we want at this point. We don’t want a drastic fall in CPI or drastic fall in PPI because that would insinuate there’s some sort of demand destruction, which as we just mentioned, it’s not a demand issue we’re dealing with. We’re just getting a little bit more supply.
Noah Brooks:
I have a parking lot indicator. I don’t know if you have any of those indicators, but here in where I live, I always think to myself, during the global financial crisis, I would go into the major shopping center area and the Target and the Walmart and all those places. And at that time you’d go in on a Saturday afternoon and there was very few cars there and it really took a fair amount of time to actually see people coming back and shopping. And this is my daily habit. I go in, I look around, the parking lots are full. I mean there’s no question about it. That’s obviously anecdotal, something that I look at, but that’s
Chris Needs:
Like a Jim Cramer thing. Back in the day you said he would go out to Philadelphia Mills, was it called up in the northeast and he’d look at the traffic in the store and just say, Hmm, this is where the consumer’s at or how retail strength is. And we got a good retail number today as well. So it was up 1% versus I think it was only 0.3% expected. And it’s nice to see the consumer hanging in there and again, just reiterates, we’re not looking at an economic crash scenario, just a slow and steady slowdown would be kind of what the Fed’s goal was and what we’re looking for at this point when we’re looking at the data.
Noah Brooks:
So you said a slowdown. I just want to add to that a little bit. For all intents and purposes, we were locked up in 2020. We were locked up in 21 for myself and my wife. We didn’t really start doing anything until 2022, late 2022 as a matter of fact. And then I heard this term coined at some point last year, revenge spending and I was locked up for all that time. Let’s go here, let’s do this, let’s buy that. And I would say that I’m probably guilty of it
Chris Needs:
A little bit of treat yourself in there there a
Noah Brooks:
Little bit of treat yourself, right? It’s like a spa day sometimes only
Chris Needs:
Spending, are you
Noah Brooks:
Avenging yourself? I don’t get that part. But no, you’re making up for lost time, right? Trying to pack in things that you didn’t do over that time period. And I would tell you that I think a lot of people participated in that. I certainly know we did. I would imagine you did as well. And my position on this slowdown is that it’s less of an economic slowdown and more of a return to normalcy of spending. And so I think we are going to see some type of slowdown, but it’s not the same thing as certainly not a recessionary type of scenario. Anything could change, but we’re not in that position where the housing market is about to crack. We went through a time period in the global financial crisis where we were giving out mortgages to landscapers making 30 grand a year, could buy an $800,000 house.
Noah Brooks:
That’s not happening. The mortgage market is in good shape. In fact, mortgage rates are coming down in anticipation of the federal reserve lowering rates. I had a note here. We were at 4, 7, 5 on the 10 year earlier this year. I think it was April mid-April 4, 7, 5. Today we’re at three eight, well under 4% on the 10 year. And mortgage rates are just coming down. I don’t want to say dramatically, but they’re coming down. That’s going to really be helpful. There was an article this weekend about people refiling already from their stuff six months ago or eight months ago, just kind of nutty.
Chris Needs:
People were chomping the bit. I’m sure a lot of realtors out there were telling them, oh, don’t worry about this high mortgage rate, you’ll be able to refi shortly. So everybody’s been chomping the bit, sort of keeping an eye on the rates and I don’t know what the trade off is, but maybe when you’re one and a half percent down from the highs, it becomes a good financial decision. Refi, there’s cost associated obviously when you refi, but
Noah Brooks:
Yeah, well, so rates coming down bad for money Market mutual funds good for bonds, right? So the bond index is actually up. I mean we had three back to back years of negative returns in the bond market and here we are bond index up a little over 2.75% as we stand right now. I mean it’s not great, but it’s certainly not down for the year. So I think and what we saw the other day with on Monday when the market was down, bonds were up.
Chris Needs:
We briefly saw that again, intraday on inversion of the twos and tens, which has since gone back. We close a day, still inverted, but we’re getting there. Was it, I think it was 11 basis points when we’re looking at it this morning. So we are very close to breaking that record inversion.
Noah Brooks:
Yeah, absolutely. So speaking of records, I saw this, it’s a little bit morbid. It’s a list, the top 10 causes of death in the United States last year and it just came out, which is why I say what makes me think of it, but Covid was number 10 on the list down from number four last year, and I don’t know if you know anybody with Covid right now, but I actually know a few people. It seems like it’s coming back a little bit. Number one on that list of killers for 2022, heart disease, 22% of all deaths, almost 700,000 people. The
Chris Needs:
Normal leader is heart disease
Noah Brooks:
Generally just second cancer, all sorts of cancers. So those are both 20% or more and then it dropped down to accidents or unintentional injuries at 7.5%. On there you have strokes, COPD, Alzheimer’s diabetes, kidney disease, liver disease, and then covid. It’s wonderful. This is kind of weird. Wonderful to see Covid coming off and I guess the normal stuff going back, I don’t want to deal with that again, but there are some people that I know there are some people out there, so
Chris Needs:
It’s hanging around. Yeah.
Noah Brooks:
Are you
Chris Needs:
Going to, it’s trying to stay relevant.
Noah Brooks:
It’s trying to stay relevant. I hope it doesn’t. Yeah, I hope it doesn’t. What else do we have? Economic speaking or anything?
Chris Needs:
Well, we could follow up with, we were talking sort of joking around about what was the biggest eBay items out there. Oh, last time. Yeah, so in history, the purchases, there was a gig that was apparent. Again, had no business being on eBay is how I look at, but 168 million,
Noah Brooks:
That was the largest purchase ever on eBay. Yep. Okay.
Chris Needs:
There was a Gulfstream two jet that was 4.9 million. Huge disparity there. Again, two things that I don’t think should be on eBay, but I guess that’s where they wanted to make their stand and sell it. Was it
Noah Brooks:
The founders of eBay and we know who they are, right?
Chris Needs:
Yeah, but I don’t know who were the sellers. That would make sense though. Someone associated, and then third was an interesting one, lunch with Warren Buffet at 2.6 million.
Noah Brooks:
Would you pay 2.6 million for lunch with the Bar Buffett?
Chris Needs:
I don’t have 2.6 million.
Noah Brooks:
Oh, great. Yeah.
Chris Needs:
Got it, got it. But no, I probably wouldn’t. I could just read the thousands of books about him. I’d be good with that.
Noah Brooks:
Okay. I mean I wouldn’t mind talking to him if I didn’t have to give him 2.6 million.
Chris Needs:
Buy share, Berkshire, Berkshire and try and meet him in Omaha. Yeah.
Noah Brooks:
Okay. Let’s touch on inflation a little bit. We just said that it came down to 2.9, that was the headline number, core inflation just a little bit higher at 3.2, but it does seem like we’re moving in the right direction. Certainly around here in Iron Neck of the woods, gas is continuing to come down. There are some things that are going up a little bit, right?
Chris Needs:
Yeah, of course there is. I mean we still have insurance that’s hanging around higher than normal. I’m sure with hurricane season that won’t help. Obviously that’s not car insurance, but you’ll probably see home insurance. Everybody’s heard about Florida and how tough it is to get insurance down there. There’s still pieces that are going up, but it’s certainly not like last year or especially two years
Noah Brooks:
Ago. I was talking to one of our advisors at a conference this past weekend and they were telling me their parents have a place Coral Gables, that they paid something like 350,000 for maybe 10 years ago and I guess they paid off the note maybe 15 years ago, but their home insurance is like $2,500 a month. They’re hurricane insurance, flood insurance, things like that. That’s kind of nutty.
Chris Needs:
Yeah, that’s difference making right there for sure. Difference
Noah Brooks:
Making. Yeah. Anything else notable?
Chris Needs:
We had the DOJ coming down on Google, thought that was interesting. First real antitrust case. Google was apparently monopolizing or doing unfair practices with Google search with exclusivity deals and buying spots on, for example, like phones and things like that, browsers. And they basically lost that court case. I think it actually concluded in May, but they’re weighing basically what they’re going to penalize them with, which could potentially be breaking them up. Now we had Microsoft back in 98 sort of lose, but then on appeal they sort of won on appeal and basically a lot of the penalties or repercussions were mitigated. And then before that you have to go back to the eighties with at and t when,
Noah Brooks:
Sure, my bell was broken up, but Microsoft was accused and it seemed like they were proven to do some of the same exact things with the exclusive deals that Google’s doing. It was on the computer and instead of the phone. But I mean you think about search engines, I know that there’s people like I use DuckDuckGo because they don’t sell my stuff. I’ve heard that. We know someone in here that does that. But imagine trying to start a company, a search engine company today, how there’d be no way to do it. Even if you had a lot of money, there would be no way to do it. You would get zero traction. You would have no computer retailers, no phone retailers that would put you in there as a default.
Chris Needs:
There has to be a way to differentiate from the existing and that’s so difficult with the cash outlay that would need to be done. But the closest thing you think of maybe an open AI would be slightly different than a normal search that could affect Google and obviously Google was affected by that when open AI came out. I thought it was interesting. You mentioned Duck, duck go. Their CEO was actually testified. He was called to testify about and he said, no, don’t break them up, just prevent these exclusivity deals. And I thought that was pretty interesting. You just call up their competitors to come testify against you or weigh in on it.
Noah Brooks:
Who else are you going to call? Speaking of CEOs, what CEO news do we have this past week, right? Starbucks?
Chris Needs:
Yeah, that was big news. Starbucks poached Chipotle’s, CEO Brian. Yeah, Brian Nichol. And basically he got a massive deal to go to Starbucks. It moves Starbucks stock drastically 25%. And then on the other side of things, Chipotle got hit on it. They got down to I think at most maybe 13% intraday before coming back a little bit. But definitely big news. He gets to stay in his home in California. He’s not required to be on location in Seattle. He got a good little gig, good pay package. Hopefully he’ll start a turnaround story with them and maybe get their online going correctly. They’ve had struggles with their online and their app and it was a big move though for sure. It was a big win for Starbucks. Apparently Howard Schultz was happy with it.
Noah Brooks:
Well, so we should delve in. What’s the gentleman who he’s replacing?
Chris Needs:
I don’t know the name off the top of my head, but he had a rough little stint.
Noah Brooks:
He was kind of famous for saying that he stopped work at six o’clock at night and it would have to be somebody really, really important for him to answer the phone. And you’re like as the CEO of a Fortune 100 company, you’re going to stop work at six o’clock tonight or six
Chris Needs:
O’clock. Funny thing with a stock like that, the market immediately weighed in and it’s like this is what they thought of you and this is what they think of the new guy.
Noah Brooks:
Yeah, tough. That would be tough on my psyche, but I mean he kind of did it to himself. I don’t know where everything goes. Especially Starbucks because it seems like they’ve had the market cornered on coffee for forever essentially. And now you’re starting to see a lot of other franchises pop up and I’ve tried a number of them. I’m not a giant coffee drinker, but I’ve tried a number of them and there’s some other, and there’s a Dunkin Donuts everywhere you look, but around here we have
Chris Needs:
Seven Brew, seven brew
Noah Brooks:
And it’s pretty good.
Chris Needs:
I like the Rice coffee Dutch bros out on the West Coast. Dutch
Noah Brooks:
Brothers, right? Yeah. I mean, so I don’t know how you have that moat around you because it’s Starbucks and then after a while it’s just like, well, okay, there’s lots of other coffee
Chris Needs:
Places. I mean there’s a number of things. We talk about inflation and everything. I got a large coffee large latte, and my wife got a medium iced coffee and it came out to $15 at Starbucks. I’m like, it does pack a little extra punch. I don’t know if it’s worth $15. I could get three coffees and two sandwiches at Dunkin Donuts for that same price. Yeah,
Noah Brooks:
I’ve been on their Starbucks cold brew in a can and I found that you can ’em by the 12 pack on Amazon, eight pack on Amazon and they’re only like 2 65 a piece instead of at the soar. They’re like four 50 a piece. So yeah, I ordered two cases the other day.
Chris Needs:
Speaking of CEOs, Boeing found a new CEO Kelly, he was at Rockwell and he had overseen a number of transitions and then ultimately, I guess Rockwell got bought out by Raytheon and that’s when he sort of stepped away, but he got tapped for the Boeing role to sort of lead their turnaround. NASA actually hit Boeing with another thing saying they’re opening an inquiry into their space launch system. Well how about these astronauts just continues. They’re stuck up there. So they
Noah Brooks:
Were supposed to be up for two weeks and now it could be a year. I mean you prepare yourself for something like, Hey, I’m going to go to summer camp. It’s going into space for two weeks and then all of a sudden, hey,
Chris Needs:
You going to stay a little longer, a little
Noah Brooks:
Bit longer. And now it’s not until March of 2025.
Chris Needs:
Yeah,
Noah Brooks:
That’s nutty. I couldn’t imagine. And how would they have the provisions for that?
Chris Needs:
They’re going to have to stretch him. You ever watch The Martian where he’s booking out one quarter of a potato? That’s what I imagine’s going on up there. The female astronaut, I apologize, I don’t have her name, but they showed her talking and I feel like it was representative where her mind’s probably at because her hair was just all crazy on this.
Noah Brooks:
What are you going to do? You can’t take a shower. Shower, can you inquiring minds want to know? Yeah,
Noah Brooks:
We will come back to that one Now we were talking about Microsoft a little bit earlier and famously Microsoft’s in most operating systems except Apple. I mean I guess there’s some people out there using a few different things. The majority of people are using a Microsoft platform. There’s another large majority, I guess that’s not another, there’s another group of people that are using Apples, but one way or the other, you’re going to touch those two products. August 12th, earlier this week it was the 43rd anniversary of IBM bringing out the pc, the first pc, so that was August 12th of 81. They did that 43 years ago and we’ve already gone through the pc. I mean everybody in the firm has a pc. Everybody out there listening to this has a PC or a laptop, but now we’re in a situation where we’re just moving to larger phones.
Noah Brooks:
Right? I went back, I looked at IBM since that time period, since August 12th of 81 and they’re stock and there’s not too many companies out there. There’s certainly some that have been around that long, but IBM since then is up 2450%. I looked at Microsoft over that same time period. Now they weren’t out in 81, they came public in March of 86, but from that time period they’re up 650000% versus the 2400% from IBM. And you think about Blockbuster and Netflix, right? Blockbuster could have been Netflix, JCPenney, could have been Amazon when I was a kid. We would go to the
Chris Needs:
IBM didn’t evolve.
Noah Brooks:
Yeah, they didn’t evolve. We would go to the Not warehouse. The J Ney had a catalog outlet that you’d buy stuff on the catalog and then it would come in and they’d call you and say it’s here and you’d go to town and you get it. Had they just worked on that a little bit, they could have been Amazon. All right,
Chris Needs:
Got to be a visionary. Got to make those changes. Got to look at your processes and update ’em. I think Bill Gates had a process of every year or two years you need to review. Every two years you do a hard review and in three years if it hasn’t changed, you need to get rid of it,
Noah Brooks:
Basically
Chris Needs:
Do something better.
Noah Brooks:
Well, I guess we’re always looking for the next Microsoft and not IBM, although recently IBM has done pretty well over the last year or two, but historically it has not been a great performer. Especially not over that time period, but maybe they’re looking to reinvent themselves. Alright, so we know a rate cut is coming. We think it’s in September. I would be surprised if it’s not, but I guess there’s a chance if you’ve been listening to this, we’ve said, I said six months ago, I didn’t think it was going to be until after the election. There’s an election coming up. I didn’t think it was going to be until after the election. Now it looks like it is going to be, and there’s a debate about whether it’s going to be 25 or 50. I don’t know that it really matters. It’s telegraphing that the rate cut cycle is coming. I think that’s the point that’s important. Market is ready for it. I think if we do get 50, it might be a good week in the market. Good move there. I think if we get 25, it’ll start that cycle and they’ll continue to lower. Especially
Chris Needs:
With, I’m sure with Jackson Hole coming up next week, I’m sure Powell’s going to lay the groundwork and sort of give us an insight what to expect. So we’ll keep an eye and gauge whether he’s edging towards 50 or 25 in September.
Noah Brooks:
Yeah. Awesome. Alright everybody, thank you so much for tuning in. As always. I’m Noah Brooks, and with me is Chris needs questions, comments, thoughts, anything you want us to take a look at? Send your emails to market enthusiast@goodlifefa.com. Until next time, don’t bet against America, anybody.
Disclaimer
The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a decision. Economic forecast set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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